PMS Vs MFs

 

In India, Portfolio Management Services (PMS) and Mutual Funds (MFs) are both investment avenues but operate differently in managing investors’ funds.

While both investment avenues involve investing in similar stocks, they differ significantly in their implementation, management, and portfolio construction strategies.

Mutual Funds operate through pooled funds contributed by various investors, managed by professional fund managers. These funds are diversified across a range of stocks and other assets based on the specific mutual fund’s objective. MFs come in various types such as equity funds, debt funds, hybrid funds, liquid funds, fixed income funds etc. The portfolio construction in MFs is typically designed to cater to a broader set of investors with varying risk appetites.

On the other hand, PMS offer a more personalized and tailored approach to investing. PMS involves a professional portfolio manager handling an individual’s or a group of individuals’ investments. Unlike mutual funds, PMS offers a more customized portfolio construction based on the investor’s risk profile, investment goals, and preferences. This service generally caters to high-net-worth individuals (HNIs) who seek more personalized investment strategies and are willing to pay higher fees for individualized attention.

The differences in these approaches lead to varied management styles, fee structures, and levels of control for the investor. While mutual funds provide a diversified and less hands-on approach, PMS offers more customization and direct involvement in investment decisions, making it suitable for investors seeking a more personalized strategy aligned with their specific financial goals and risk tolerance.

Portfolio Management Services (PMS)

There are three distinct models of PMS: 

1. Discretionary: In this model, the portfolio manager possesses the autonomy to make investment decisions without prior consent from the investor. With the power of attorney (PoA), they can execute trades, buying, and selling shares on behalf of the investor.
2. Non-discretionary: Here, the client retains the authority to approve or disapprove every buy or sell decision made by the portfolio manager before any action is taken. The portfolio manager can only proceed after receiving explicit confirmation from the investor.
3. Advisory: Under this arrangement, the portfolio manager provides guidance and recommendations regarding the portfolio’s management, but the responsibility for executing these suggestions lies solely with the investor. Moreover, as of January 2019, SEBI regulations stipulate that the minimum investment amount for PMS is Rs 50 lakhs. It’s essential to note that PMS is a regulated service governed by SEBI to ensure compliance and investor protection.

Mutual Funds (MFs)

In mutual funds, investors typically do not have any discretionary involvement in the fund’s buying or selling decisions. The fund manager handles these decisions based on the fund’s investment objectives and as per the guidelines laid out by SEBI.

Difference between PMS and MFs

1. Customization and Expertise-PMS tailors portfolios for specific investors or groups, allowing customization in sectors, capitalization, and allocation. Portfolio managers, skilled in global markets, optimize decisions for each investor. In contrast, MFs offer standardized options for everyone.
2. Flexibility in Investments-PMS exhibits flexibility in adjusting equity allocations based on market conditions and investor needs, potentially outperforming markets. MFs are constrained, mandated to invest up to 65% in equity regardless of market fluctuations.
3. Focus on Performance-PMS prioritizes maximizing absolute returns, while MFs have to adhere to diversification rules, valuation guidelines, and redemption regulations, impacting their ability to solely focus on returns.
4. Individual Investment Approach– PMS is like tailoring clothes – it makes a portfolio that fits each person. It considers what each investor wants, their money situation, and how much risk they can handle. On the other hand, MFs put everyone’s money together, not thinking about what each person wants. This might cause trouble for one person when others take their money out.
5. Transparency and Disclosure-PMS disclose information to clients but not publicly, making it challenging to assess and compare different PMS products. Conversely, MFs operate under strict regulations, offering transparent, publicly available information, facilitating easy performance comparisons and NAVs (net asset values) are declared daily.
6. Fees Structure-Mutual funds charge entry and exit load on schemes, while PMS charge various fees like entry load, management fees, and performance fees, offering different fee structures, including fixed fees, hybrid fees, or performance-based fees. Some PMS firms charge based on the profit they help you make. This can motivate the fund manager to work hard and achieve the returns you expected.

 

In a PMS, there are usually 3 different choices for fees:

1. Fixed Fee Structure: This entails a 2.5% Annual Management Charge (AMC) with no additional performance fee. The fund manager receives a steady fee regardless of the fund’s performance.
2. Hybrid Fee Structure: In this model, a 1% fixed fee per annum is charged along with a 15% performance fee above a specified hurdle rate of 12%, without any catch-up provision. This encourages the manager to strive for returns beyond the predetermined benchmark.
3. Performance-Based Fee Structure: This option involves no fixed fees but charges a 20% performance fee above an 8% hurdle rate. The manager is rewarded based on the fund’s performance exceeding the specified benchmark.

The above fee structure is for the illustrative purpose only. Actual Fee Structure would vary from one PMS to another.

• Taxation– Long-term capital gains in equity mutual funds are taxable at 10% each year on the profits above Rs 1,00,000. Short-term capital gains are taxable + cess & surcharge. But in mutual funds, you only pay taxes when you take your money out. In case of PMS taxes are different. Every time you buy or sell shares in a Demat account, you might have to pay taxes on the money you make. PMS tries to make up for this by aiming to give you better profits.
• Investment Process and Documentation-Investing in MFs is straightforward through multiple channels. In contrast, PMS investment procedures are more complex, involving substantial documentation and time due to larger transaction values. Overall, PMS offers tailored solutions, flexibility, and individualized attention but involves higher complexity and potentially higher returns, while MFs offer simplicity, transparency, and standardized options suitable for a broader investor base.